Hyperinflation is that transition period when a paper money is clearly failing as a store of value but has not yet died as a medium of exchange. This blog is to look at this and any other interesting economic issues. Vincent Cate

Saturday, November 8, 2014

First Exchange Rate Drops Then Hyperinflation

I believe the normal case for hyperinflation is that the exchange rate drops first and then the inflation picks up after. The exchange rate reacts quickly while the huge number of prices that make up inflation indexes take longer to adjust.

I expect that Japan will see the Yen exchange rate drop much more before they start getting high inflation.

The Yen seems to be going the way my theory predicts for most of the last 3 months. Most of the last 3 months it goes down more in 1 week than the total interest earned for 5 years of holding a 5 year bond (total of 5 years at 0.1% per year being about 1/2%). It is crazy bad to hold JGBs and people are getting out. This means the central bank is printing Yen like crazy to buy JGBs. But this makes the Yen and JGBs even worse. Really seems like the death spiral has started.